Does monetary policy stabilize the exchange rate following a currency crisis?
Ilan Goldfajn and Poonam Gupta Full Text of this Article (PDF 268K) Abstract: This paper provides evidence on the relationship between monetary policy and the exchange rate in the aftermath of currency crises. It analyzes a large dataset of currency crises in 80 countries for the period 1980–98. The main question addressed is whether monetary policy can increase the probability of reversing a postcrisis undervaluation through nominal appreciation rather than higher inflation. We find that tight monetary policy facilitates the reversal of currency undervaluation through nominal appreciation. When the economy also faces a banking crisis, the results are not robust and depend on the specification.
